Understanding more about the financial performance of your
company will help you see trends as they are developing and not
wait until a crisis. Some problems are acute-they happen
suddenly-and some are chronic-they go on for years and you learn to
live with them. Here are seven situations that should put up red
flags.

1. Little or No Revenue Growth.
Early-stage companies normally experience substantial growth as
customers find you and your market enthusiastically. Then there is
a leveling-off period when growth seems to slow and then stop. It
may work to spend a short period at that plateau while you allow
your business systems to grow to handle the volume. But then you
must look at ways to get back on the growth path.

The reasons not to do so are understandable. You may be working
50 - 60 hours a week just to handle what you have and there is
little time to find new clients, even if you thought you could
handle their business. But growth is a necessity-because even with
a reasonable level of inflation, flat revenues really mean a loss
of revenues in terms of real dollars.

And, as you know, the costs to operate your business never go
down. Rent, utilities, phone, and even postage are always going up.
And wages too, including your own. As your employees become more
experienced, you will want to pay them commensurate with their
contributions, so raises are understandable, in benefits as well as
salary. You may have added insurance and additional vacation time.
All of this has a cost. And you need to replace and update
equipment as well.

So what effect does flat growth have with this scenario? It
lowers your profit. Costs become a greater percentage of revenue
and ultimately profits become smaller. It may begin to create a
serious cash squeeze and imperil your ability to pay debts and keep
up with needed equipment purchases or repair.

2. Deteriorating Capital Base
Periods of flat growth in revenue can cause a negative cash flow.
You need a steady stream of profit to allow cash to pay principal
debt service and allow for reinvestment in new technology,
equipment, or new project development.

After a fairly short time, you will find yourself in a double
bind. You aren't generating enough cash to fund any meaningful
growth and this lack of profits may prevent you from borrowing to
fund it as well.

If you have gotten to this point, chances are your alternatives
are few. One may be to look to outside investors for funds,
although you may have to give up a good bit of control to get the
capital you need. The other possibility is to sell off assets to
raise cash. This may be a dangerous strategy, without considerable
thought. You don't want to sell something you will need later
on. Selling slow-moving inventory at a loss will affect profits as
well as solvency.

3. Equipment Failures That Threaten Productivity
Not having positive cash flow will not just jeopardize growth; it
will also affect current operations. If your equipment is not
operating properly, your production may be slower, or quality not
what you need or expect. In addition, total breakdowns will stop
production and cause employees to stand around not accomplishing
any work. This will raise your direct costs and lower profits even
further.

4. Poor Employee Morale
Look around at your employees and give close consideration to what
you see. Are they angry, disillusioned, or confused? Are they short
of inventory, working on substandard equipment, or always fending
off threatening phone calls? Are you communicating with them?

Surely you know that having good employees is a contributing
factor in the growth and success of your venture. So it makes sense
that when (and if) they feel negative, this will have the opposite
effect. The most immediate result will be diminished productivity.
People who don't care, show it. They take more time off and
seldom think of ways to accomplish the task at hand more quickly or
more efficiently. If wages are frozen or bonuses missed, the
attitude becomes "What's the use?" And your job
becomes tougher because the need to communicate becomes more
urgent.

And remember as well, your employees are often the public face
of your company. If they have gripes, that's where they may air
them. I still remember traveling on TWA Airlines in the midst of
its most difficult times. All you heard from employees were
complaints and dissatisfaction. It made the trip uncomfortable and
forced me, a fairly frequent flyer, to look at other airlines. I
wasn't the only one, and the loss of business further hurt the
weakened airline.

There are not merely business reasons to care about the concerns
of workers. There are human reasons as well and you want to keep a
sense of community in your company.

5. Unpaid Taxes
No business owner sets out to get into trouble with the tax
collector. Most of us have enough sense to know how painful that
can be. But it may start accidentally and grow quickly. It often
starts with a single payroll when the money isn't fully
available. Paychecks are issued with the expectation that withheld
taxes will be covered as soon as customers begin to pay outstanding
invoices. But by the time these payments are received, other bills
have to be paid or another payroll is coming up. Before you know
it, taxes are owed and the money just isn't there. Now you are
on dangerous territory.

First of all, many taxing bodies have the power to collect that
exceeds those of ordinary creditors. They can make a demand for
payment, file a lien, and execute a levy on your bank or even your
customers in record time. They are effective collectors.

Second, the financial burden grows very quickly, particularly if
unpaid returns are not filed. For federal taxes, there are
penalties both for failure to file and for failure to pay-5% per
month. So, in the end, you won't just be paying the tax, you
will be paying back the tax plus penalty and interest.

Another consideration is the possibility of personal liability.
If you are the responsible officer, that is, the one who makes the
financial decisions, an assessment can be made against you as well
as your company. Then the collection actions will be aimed at your
assets.

And if all this weren't enough to motivate, there is also
the matter of criminal prosecution. It is unlikely for payroll
taxes, but it is far more frequent for not remitting sales tax.
That is often charged as theft, as the money belongs to the state,
not your company. If your business has found itself in this kind of
trouble, see a professional as soon as you can. This is one problem
you can't ignore!

6. Failure or Closing of Major Customer
Most new businesses are warned about becoming dependent on a single
customer or even a few. That is easy in theory, but often difficult
in practice. When a customer offers you a lot of business, it
isn't easy to turn it down. If you are in an industry where
there are only a few players of any size, this may be your
reality.

If it is and one of these major customers cuts back operations,
files for reorganization, or closes, your entire business may be
jeopardized. So pay attention to what is happening within the
industry as well as with your customers.

If payments get slower, take some action. If the company is big
enough, the accounting side does not talk to the purchasing side,
so you won't lose the business. Anyway, if you're not going
to get paid, you don't want the sale. I had a client who was a
small electrical contractor who allowed a major Fortune 100 company
to get so far behind that my client had to file bankruptcy.
Minimize your exposure.

If orders slow down, don't wait until they stop: Get out and
look for new business. At the same time, keep your lines of
communication up with your customer. These are the times when you
have to work hard just to stay even.

7. New Technology Creating Pricing Pressure
The landscape of America is full of rusted plants, some of which
are still partially in operation. It's impossible to believe
that they could be efficient. Jobs that were done by workers are
now being done by robots. Planning production is done by computer.
Inventory and shipping are managed by scanners. The years bring new
technology: If older companies cannot afford to keep up, they are
likely unable to compete.

Labor-intensive businesses must be able to avail themselves of
labor-saving devices. Pricing pressures come from those domestic
companies that can afford to do so in addition to the offshore
operations that use low-cost labor. Staying in business without
making a profit makes little sense.

These are not the only serious problems a company can run into.
I could write a book about the perils of the dot-com companies,
their overuse of venture capital and underuse of business models.
Regardless of how new an idea is and how clever the folks who
thought it up, business is now and will always be about revenue
exceeding costs and creating profit. This is not a theory; it is a
reality and you must have a stream of income.

The latest and greatest idea may come and go, but at the end of
the day, it's hard work and good dealings that secure the
future for most businesses.